Investment in Africa

Currency risk – Exchange rate regimes

Most African countries have a pegged exchange rate regime, with conventional pegs being the most popular.

The CFA-franc zone

The CFA franc resulted from French influence in the region, with most members being former French colonies. After independence, these countries signed a monetary cooperation agreement with France.

Members of the CFA franc zone include:

Benin*
Burkina Faso*
Côte d’Ivoire*
Guinea-BISSAU*
Mali*
Niger*
Senegal*
Togo*
Cameroon
Central African Republic
Chad
Republic of THE Congo
Equatorial Guinea
Gabon
*West African Economic and Monetary Union

 

At a superficial level, proponents of the policy regard it as a stabilising force that has provided exchange rate certainty and low levels of inflation amidst a period that was typically characterised by highly volatile exchange rate movements and high levels of inflation seen in other African countries.

Critics of the policy regard it as a tool that cedes power from the member countries to France and central banks of the CFA area. Through using the euro as an anchor, countries must follow the policies adopted by the European Central Bank to keep parity.

Empirically, exports from the CFA zone to Europe fell from 50% to 25% in the last 20 years, as countries such as Nigeria, India, Thailand, and China become more dominant trading partners.

Empirically, exports from the CFA zone to Europe fell from 50% to 25% in the last 20 years, as countries such as Nigeria, India, Thailand, and China become more dominant trading partners. Inflation levels in the CFA franc zone have remained lower than other comparable countries and, while growth was relatively subdued, it was not significantly different from other countries with comparable levels of development. The peg enabled the CFA franc countries to survive the fall in the oil and commodities prices without any resulting currency collapse. However, this may have negatively affected exports due to the strength of the euro over this period.

The CFA franc faces several challenges and remains a politically contentious issue. There were benefits gained through the use of the single currency, at the very least through the adoption of fiscal discipline. However, the long-term survival of the CFA franc is uncertain. One of the more recent proposals involves the adoption of a new currency, ECO, which would replace the franc and see the addition of more countries into the single currency zone. However, challenges here remain much the same as with CFA, including financial integration among different member states.